1.3 Opportunity Cost and Choice CONTEMPORARY ECONOMICS 6/15/2018 1.3 Opportunity Cost and Choice Objectives Define opportunity cost. Evaluate guidelines for making choices. Analyze the opportunity cost of attending college. LESSON 1.3

1.3 Opportunity Cost and Choice Key Terms opportunity cost sunk cost

1.3 Opportunity Cost and Choice The opportunity cost of an item or activity is the value of the best alternative you must pass up.

Opportunity Cost Nothing better to do? Estimate opportunity cost 1.3 Opportunity Cost and Choice Opportunity Cost Nothing better to do? Estimate opportunity cost Opportunity cost varies

Choose Among Alternatives 1.3 Opportunity Cost and Choice Choose Among Alternatives Calculate opportunity cost Time—the ultimate limitation Ignore sunk cost Sunk cost is a cost you have already incurred and cannot recover.

The Opportunity Cost of College 1.3 Opportunity Cost and Choice The Opportunity Cost of College Forgone earnings Direct costs of college Other college costs Other-things-constant assumption

How an economist views a firm How an accountant views a firm Rev- enue Economic profit Accounting profit revenue Implicit costs Opportunity cost Explicit Costs Explicit costs

PROBLEM… Farmer McDonald gives banjo lessons for $20 per hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What opportunity cost has he incurred? What cost would his accountant measure? If the seeds will yield $200 worth of crops, does McDonald earn an accounting profit? Does he earn an economic profit?